How much life insurance should I have?

This is a frequently asked question.  If we wanted to be flippant we would say, “you don’t need any, as long as nothing bad ever happens to you”!  But of course, no one can guarantee that, so the answer is “you should have JUST enough insurance.”

So, how do we calculate what is “just enough”.

First, we need to identify the risks that apply to you. In other words, what could go wrong that could cause you, or those close to you, financial pain?

Well, if you are working and relying on an income, then if you suffer an injury or illness that stops you working for a significant period, that would for most people, cause a lot of financial pain.  If you have debts to service as well, then the pain would increase.

If you have dependents who rely on your income, what would the financial impact be on them, if for example you died, or became totally and permanently disabled?

What about if you suffered a major trauma that resulted in you incurring significant medical costs?

Determining how much cover you need and what type of cover you should have, is something that, if you do it yourself, can be plagued with pitfalls.  We strongly recommend that you work with a financial advisor because the chances of getting it wrong are significant, and the consequences of getting it wrong could be catastrophic.

Is there an alternative to insurance?  Yes, there is – you can “self-insure”. But to do that you would need to have significant assets. A financial planner can help you determine if you are in that position or not.

If not, then you will need to start identifying the most appropriate type, and amount, of insurance.  There are literally hundreds, if not thousands, of products on the market.  You really should get advice on which are most appropriate for your needs, circumstances and budget.

As an example of how much cover you need, suppose you have a debt on your home of $400,000 but also you have a non-working spouse and one dependant child.  You may think that if you died, as long as the debt on the house is covered by insurance for $400,000, then the family would be ok.  It may be.  But have you factored in what they would live off if you weren’t able to provide an income for them?  So, this is where the calculations become complicated because you need to take into account any cover you may already have, such as within your superannuation fund, and you need to take into account any other assets you have, such as your superannuation balance.  Then you need to consider how long you wish to provide an income to your family for.

The same applies if you are disabled.

Performing this calculation, and getting it right, could be the most important single thing you will ever do to secure the financial future of you and your family.  So – seek advice!

And in any discussion on insurance, there are other matters on which you will need to take decisions.  These will include;

  • Should I hold as much of my cover as I can, in my superannuation fund? (This can be very tax-effective but the premiums will reduce your ultimate retirement benefit unless compensated for)
  • Should I pick a policy which is cheap now but gets more expensive as I get older (a “stepped” premium) or one that is a bit more expensive now, but the premium rate will generally stay the same (“level” premium)?
  • Will my need for cover increase or reduce as I get older?
  • Do I want/need a “bells and whistles” policy or will a basic one be sufficient for my purposes?

It is extremely difficult for anyone other that someone trained and experienced in this area, to answer these questions correctly.  That’s why we recommend you seek professional advice.

But there is one thing that is certain about insurance – you can always get it when you don’t need it, but you can never get it when you ultimately need it!

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